Calculate the annual growth rate of your investments or business metrics. Perfect for investors, business owners, and financial analysts.
The initial value of your investment or metric
The final value of your investment or metric
The time period of your investment or metric
Compound Annual Growth Rate
0.00%
Annual growth rate over the period
Total Growth
0.00%
Total percentage growth over the period
Value Growth
$0.00
Total value increase over the period
Understanding Compound Annual Growth Rate (CAGR)
THE KEY TO MEASURING CONSISTENT GROWTH
Master growth calculations with this fundamental formula:
CAGR = (Ending Value ÷ Beginning Value)^(1 ÷ Number of Years) - 1
✓ WHAT THIS POWERFUL METRIC REVEALS: The Compound Annual Growth Rate (CAGR) measures the mean annual growth rate of an investment or business metric over a specified time period. It provides a smoothed annual rate that eliminates the volatility of periodic returns.
✓ WHY IT MATTERS:
- HIGH CAGR (>15%): Exceptional growth performance
- MODERATE CAGR (5-15%): Solid, sustainable growth
- LOW CAGR (<5%): Slow but steady growth
✓ PERFECT FOR:
- Investors analyzing portfolio performance
- Business owners tracking company growth
- Financial analysts comparing investments
- Entrepreneurs evaluating business opportunities
Real-Life Examples of CAGR Calculations
Example 1: Investment Growth
An investment grows from $10,000 to $20,000 over 5 years:
- Beginning Value: $10,000
- Ending Value: $20,000
- Years: 5
Step-by-Step Solution:
- CAGR = (20,000 ÷ 10,000)^(1 ÷ 5) - 1
- CAGR = 2^(0.2) - 1
- CAGR = 1.1487 - 1 = 0.1487 or 14.87%
Example 2: Business Revenue Growth
A company's revenue grows from $1 million to $2.5 million over 3 years:
- Beginning Value: $1,000,000
- Ending Value: $2,500,000
- Years: 3
Step-by-Step Solution:
- CAGR = (2,500,000 ÷ 1,000,000)^(1 ÷ 3) - 1
- CAGR = 2.5^(0.333) - 1
- CAGR = 1.3572 - 1 = 0.3572 or 35.72%
How to Calculate CAGR Step-by-Step
- Identify the Variables:
- Determine the beginning value
- Determine the ending value
- Determine the number of years
- Apply the Formula:
CAGR = (Ending Value ÷ Beginning Value)^(1 ÷ Number of Years) - 1
- Interpret the Result:
- Convert the decimal to a percentage by multiplying by 100
- Compare with industry benchmarks
- Consider the time period and market conditions
Practical Applications
- For Investors:
- Compare different investment options
- Evaluate portfolio performance
- Set realistic return expectations
- For Business Owners:
- Track revenue growth
- Measure market expansion
- Set growth targets
- For Financial Analysts:
- Analyze company performance
- Compare industry growth rates
- Forecast future growth
Life Lessons from CAGR
- Think Long-Term: Focus on sustainable growth rather than short-term spikes
- Be Realistic: Set achievable growth targets based on market conditions
- Monitor Progress: Regularly track growth metrics to stay on course
- Diversify: Spread investments to balance growth and risk
Frequently Asked Questions
What is Compound Annual Growth Rate (CAGR)?
CAGR is the mean annual growth rate of an investment or business metric over a specified time period, assuming the investment grows at a steady rate each year.
How is CAGR different from average annual return?
CAGR provides a smoothed annual rate that eliminates the volatility of periodic returns, while average annual return simply averages the returns of each year without considering compounding.
What is a good CAGR for investments?
A good CAGR depends on the investment type and market conditions:
- Stocks: 7-10% (long-term average)
- Real Estate: 4-8%
- Bonds: 2-5%
- Startups: 20-50% (high risk)
How do I calculate CAGR for irregular time periods?
For irregular time periods, use the actual number of years (including fractions) in the denominator. For example, 3.5 years for a 3-year and 6-month period.
Can CAGR be negative?
Yes, CAGR can be negative if the ending value is less than the beginning value, indicating a decline in value over the period.
What are the limitations of CAGR?
CAGR doesn't account for volatility, risk, or the timing of returns. It assumes a smooth, consistent growth rate which rarely occurs in reality.
How do I use CAGR to compare investments?
Compare the CAGR of different investments over the same time period to determine which performed better, considering the associated risks and market conditions.
What is the relationship between CAGR and compound interest?
CAGR is essentially the compound interest rate that would be required for an investment to grow from its beginning value to its ending value over the given time period.
How can I improve my investment's CAGR?
Strategies to improve CAGR include:
- Regular portfolio rebalancing
- Diversification across asset classes
- Long-term investment horizon
- Cost-effective investment vehicles
How often should I calculate CAGR?
Calculate CAGR:
- Annually for long-term investments
- Quarterly for active portfolios
- Monthly for high-growth businesses
- When making significant investment decisions
